Structured finance and securitisation in Italy: overview
A Q&A guide to structured finance and securitisation law in Italy.
This Q&A provides an overview of, among others, the markets and legal regimes, issues relating to the special purpose vehicle (SPV) and the securities issued, transferring the receivables, dealing with security and risk, cash flow, ratings, tax issues, variations to the securitisation structure and reform proposals.
To compare answers across multiple jurisdictions, visit the Structured lending and securitisation Country Q&A tool.
This Q&A is part of the global guide to structured finance and securitisation. For a full list of contents visit www.practicallaw.com/securitisation-mjg.
Market and legal regime
How developed is the market and what notable transactions and new structures have emerged recently?
What impact have central bank programmes (if any) had on the securitisation market in your jurisdiction?
Is securitisation particularly concentrated in certain industry sectors?
Securitisation transactions have been in the Italian market since 1999, when Italian law no. 130 of 30 April 1999 (the Securitisation Law) was adopted.
The Italian securitisation market experienced very rapid growth until the financial crisis of 2008 and covers various types of assets including:
Leasing and factoring receivables.
After 2008, the Italian securitisation market showed a significant decrease in the number of transactions and most of those that have been entered into have been structured to be eligible for repo transactions with the European Central Bank.
During the last two years, the Italian securitisation market has seen many transactions regarding distressed assets (in particular non-performing consumer and commercial loans).
During 2014, the Italian legislator implemented some changes to the Securitisation Law to improve the feasibility of securitisation transactions (see Question 2).
The banking sector is the main player in the Italian securitisation market and receivables owned by banks or other financial institutions are the main object of securitisation transactions.
What are the main laws governing securitisations?
What is the name of the regulatory authority charged with overseeing securitisation practices and participants in your jurisdiction?
The main laws and regulations governing securitisation are:
The Securitisation Law, as amended and supplemented, most recently by Law Decree 91/2014 (converted in Law 116/2014).
The Legislative Decree 1 September 1993 no. 385 (Italian Consolidated Banking Act), with particular reference to Article 58.
The Bank of Italy provisions of 21 April 1999 no. 229 "Supervisory Instructions for Banks".
Recently, Law Decree 91/2014 (converted in Law 116/2014) has implemented some measures aimed at:
Improving the flexibility and efficiency of securitisation transactions.
Mitigating systemic risk.
The main changes brought about by Law 116/2014 are:
Extension of the segregation protection to any claim of the special purpose vehicle (SPV) connected to the transaction.
Segregation of amounts deposited with the servicers and account banks in the case of bankruptcy of such providers.
Use of securities by insurance companies to cover their technical reserves.
Addition of asset management companies in the role of securitisation servicers.
Simplification of the assignment formalities for receivables vis-à-vis public administration.
Tax advantages with particular reference to withholding tax.
The main regulatory authorities in charge of overseeing securitisation practices are:
The Bank of Italy.
The Consob (Commissione nazionale per le società e la borsa) for listing formalities.
Reasons for doing a securitisation
Accounting practices in your jurisdiction, such as application of the International Financial Reporting Standards (IFRS)?
National or supra-national rules concerning capital adequacy?
Risk retention requirements?
Implementation of the Basel III framework in your jurisdiction?
Usual reasons for securitisation
The usual reasons for securitisation are:
Transfer or deconsolidation of receivables from the originator balance sheet.
Transfer of default risk.
Capital adequacy consideration.
Use of eligible collateral for central bank operations.
International Financial Reporting Standards (IFRS) 9 (Financial Instruments) was issued in July 2014 to replace International Accounting Standards (IAS) 39 (Financial Instruments: Recognition and Measurement), which previously outlined the accounting requirements for:
Recognition and measurement.
General hedge accounting.
Banks can use securitisation to reduce their assets and comply with capital adequacy requirements as an alternative to the capital increase, which is traditionally used for such a purpose. Consequently, investors that could fall within the scope of Basel III have to assess the regulatory capital requirements when buying notes.
In several areas such as Europe and the US, political and regulatory scrutiny of the asset-backed securities industry has been substantially increased in recent years. This has resulted in the adoption of a large number of measures for increased regulation that are currently at various stages of implementation. This may have an adverse impact on the regulatory capital requirements to certain investors in securitisation exposures or the incentives for certain investors to hold asset-backed securities, and may, therefore, affect the liquidity of such securities.
Particularly in Europe, investors should be aware that on 26 June 2013, the European Parliament and the European Council adopted the Directive 2013/36/EC (CRD IV) and Regulation 575/2013/CE (CRR) repealing in full the so-called capital requirements directive (referring to Directive 2006/48/EC and Directive 2006/49/EC).
An institution is subject to administrative penalties and other administrative measures if, inter alia, it is exposed to the credit risk of a securitisation position without satisfying the conditions set out in Article 405 of the CRR (Article 67, CRD IV). Article 405 specifies that an EU regulated credit institution, other than when acting as originator, sponsor or original lender, can assume exposure in the context of a securitisation in its trading or non-trading book only if the originator, sponsor or original lender has explicitly disclosed to such credit institution that it will retain, on an ongoing basis, a material net economic interest not lower than 5% in such securitisation.
The CRR is directly applicable and became effective on 1 January 2014. The CRD IV was implemented in Italy by the Circolare no. 285 (Disposizioni di Vigilanza per le Banche) and entered into force on 1 January 2014.
The CRD IV and CRR and any other changes to the regulation or regulatory treatment of the securities for some or all investors can negatively impact the regulatory position of individual investors and, in addition, have a negative impact on the price and liquidity of the notes in the secondary market.
It is not yet clear how the above changes will impact the securitisation market and the investors approach.
The special purpose vehicle (SPV)
Establishing the SPV
What form does the SPV usually take and how is it set up?
What is the legal status of the SPV?
How the SPV is usually owned?
Are there any particular regulatory requirements that apply to the SPVs?
The legal form usually taken by the SPV is that of a limited liability company.
In securitisation transactions, an SPV is an orphan entity (managed by a corporate servicer) and, therefore, it is not part of the same corporate group as any other transaction party.
Under Italian law, the SPV is an enterprise operating in Italy and established pursuant to Italian or European legislation. The SPV can be established in different forms, in particular, as:
An investment fund managed by an asset management company.
A trust company.
A private or public capital company (for example, a limited liability company represented by shares (S.p.A. or s.a.p.a.), limited liability company (s.r.l.) or co-operative company (società cooperativa)).
An SPV must be enrolled within a specific registry with the Bank of Italy.
Regulatory requirements for securitisation SPVs mainly relate to reporting obligations. Such requirements are set out in the Bank of Italy provisions of 30 September 2014 no. 504 "Dispositions on statistic and reporting requirements for securitisation SPVs".
Ensuring the SPV is insolvency remote
Has the ability to achieve insolvency remoteness been eroded to any extent in recent years?
Will the courts in your jurisdiction give effect to limited recourse and non-petition clauses?
Italian Securitisation Law provides that the SPVs have as their exclusive corporate purpose the carrying out of securitisation transactions, therefore reducing the existence of general creditors of the SPV. To further minimise the insolvency risk of the SPV the following steps are commonly taken:
Using a newly incorporated entity with no operating history and a limited number of known (or potential) creditors.
Including non-petition language in any agreement between the SPV and a third party, restricting such creditor's ability to initiate insolvency proceedings against the SPV.
Including limited recourse language in agreements between the SPV and a third party, restricting the SPV's liability to a creditor to the secured assets of the SPV.
Limited recourse and non-petition clauses are considered binding for the parties when such provisions are included in an agreement, however it is debatable if such provisions can be considered enforceable vis-à-vis third parties (in particular, a bankruptcy receiver).
Ensuring the SPV is treated separately from the originator
Segregation is expressly covered by Article 3 of the Law 130/1999. Any receivables relating to a securitisation transaction, including any income and any financial activity acquired with such income, is considered separate from the assets of the vehicle and from any receivables or other amount relating to any other transaction.
Assignments executed under the Securitisation Law are subject to clawback under Article 67 of the Bankruptcy Law only to the event that:
The adjudication of bankruptcy of the originator is made within three months of the completion of the securitisation transaction (or, if earlier, of the purchase of the portfolio).
Where Article 67(1) applies (for example, if the payments made or the obligations assumed by the bankrupt party exceed by more than one-fourth the consideration received or promised), within six months of the completion of the securitisation transaction (or, if earlier, of the purchase of the portfolio).
Issuing the securities
The most important factor to be considered for determining if the SPV's securities are to be traded publicly is the amount of money that the issuer needs to raise. Generally, a public listing is required when it is necessary to raise a considerable amount of money that would be more burdensome to raise by issuing privately traded securities.
Are the securities usually listed on a regulated exchange in your jurisdiction or in another jurisdiction?
If in your jurisdiction, please identify the main documents required to make an application to list debt securities on the main regulated exchange in your jurisdiction. Are there any share capital requirements?
If a particular exchange (domestic or foreign) is usually chosen for listing the securities, please briefly summarise the main reasons for this.
Securities are commonly listed on a stock exchange in another jurisdiction. Generally, certain jurisdictions offer a reduced number of constraints for the listing of securities, and a more favourable administrative process if compared to a listing of securities on an Italian stock exchange or similar market.
There are certain mandatory documents that need to be provided for the purpose of the listing. The prospectus of the offer is the most important document, providing a comprehensive summary of the most relevant features of the listed securities and, more generally, the entire transaction.
The Luxembourg and Irish stock exchanges are often preferred for the purpose of listing securities, in accordance with general market standards as the investors are more familiar with these jurisdictions.
Constituting the securities
The securities are constituted by notes, which are issued and held in dematerialised form and wholly and exclusively deposited with Monte Titoli S.p.A. in accordance with Articles 83 bis ff. of the Italian Legislative Decree no. 58 of 24 February 1998 (the Italian Financial Act), through the authorised institutions listed in Article 83 quater of the Italian Financial Act (for example, certain intermediaries). The notes are held by Monte Titoli on behalf of the noteholders until redemption for the account of the relevant Monte Titoli account holder. Title to the notes will be evidenced by one or more book entries in accordance with the provisions of Articles 83 bis ff. of the Italian Financial Act and of Regulation of 22 February 2008 of Consob (Commissione nazionale per le società e la borsa) and the Bank of Italy regarding the regulation of (all as subsequently amended and supplemented):
Central dematerialised management (servizi di gestione accentrata).
Guarantee systems and the relevant management companies.
Transferring the receivables
Classes of receivables
The Italian securitisation market contemplates various types of assets (see Question 1):
Credit facilities and mortgage loans.
Leasing and factoring receivables.
Since 2012 there has been an increase of transactions covering the above type of assets in distressed situations.
Transferring receivables from the originator to the SPV
For the perfection of the assignment of the receivables under a securitisation transaction, an assignment agreement must be entered into between the SPV and the originator. The perfection formalities of the assignment of receivables under the Securitisation Law are governed by Article 58, paragraphs 2, 3 and 4, of the Consolidated Banking Act. According to the prevailing interpretation of these provisions, such assignments become enforceable against the relevant debtors as of the later of:
The date of the publication of the notice of assignment in the Official Gazette of the Republic of Italy (Gazzetta Ufficiale della Repubblica Italiana).
The date of registration of the notice of assignment in the competent companies' register.
These formalities are now applicable to all type of debtors. Law Decree 91/2014 has recently eliminated the formalities that were still required for the transfer of receivables due from any Italian public administration.
Existing or future monetary receivables may be securitised. However, future receivables must be identifiable and pursuant to the Ministry of Economy Decree of 4 April 2001, such receivables are those generated in the ordinary course of business of the transferor.
Under Italian law it is not possible to assign certain specific types of receivables, such as alimony or governmental grants to political parties.
Prohibitions or restrictions on transfer
The receivables must be existing or identifiable.
In principle, there are no specific prohibitions on transfer but there are some requirements to be complied with in respect of Legislative Decree number 196 of 30 June 2003 and, to the extent applicable, Law number 675 of 31 December 1996. Such requirements are normally satisfied with the publication of the relevant transfer notice in the Italian Official Gazette and the service of a welcome letter of transfer on the relevant debtors.
There are certain legal limits to assignment of receivables (for example, salary or pensions) that are not relevant for the purposes of securitisation transactions.
Contracts underlying receivables can contain provisions requiring other parties' prior consent to, or contractual prohibitions on, transferring such receivables. If these provisions are present, it may be necessary in certain circumstances, to obtain the debtor's consent.
Avoiding the transfer being re-characterised
Can this risk be avoided or minimised?
Are true sale legal opinions typically delivered in your jurisdiction or does it depend on the asset type and/or provenance of the securitised asset?
The risk of a transfer of title to the receivables being re-characterised as a secured loan is not an issue under Italian securitisations, given that public formalities are completed to make the sale fully enforceable against the assigned debtors and any other third parties.
True sale legal opinions are usually delivered in Italian jurisdiction.
Ensuring the transfer cannot be unwound if the originator becomes insolvent
Assignments executed under Securitisation Law are subject to clawback under Article 67 of Royal Decree no. 267 of 16 March 1942 (Italian Bankruptcy Law), but only as follows:
The purchase of the receivables is made within three months of the declaration of bankruptcy of the originator.
Where the payments made or the obligations assumed by the bankrupt party exceed by more than one fourth the consideration received or promised, within six months of the declaration of bankruptcy.
Establishing the applicable law
Several foreign laws are generally recognised and considered enforceable. In particular, the Rome Convention on contractual obligations and the EC Regulation 593/2008 provide rules concerning the choice of law applicable to contractual relationships, and the criteria for the purpose of determining the applicable law in the absence of choice by the parties.
In some cases, Italian law overrides any foreign law's applicable provision that conflicts with public policies or similar provisions as provided by the applicable Italian legislation and principles.
Security and risk
Given the full segregation of the assets of the SPV under the securitisation transaction, the most common form of security adopted in relation to securitisation transactions, which is the pledge over collection account, will probably become less common taking into account recent developments. Usually pledges are created on the accounts of the vehicle, for the purpose of securing the deposits made on such accounts.
For the purpose of perfecting the pledge over the SPV accounts, the following are necessary:
The notification of the pledge to the assigned debtor through the Court bailiff.
The acknowledgement of the pledge by the account bank bearing a certified date.
It is uncommon for an SPV to grant security in favour of investors except for the pledge over bank accounts which is granted in favour of the representative of the noteholders (on its behalf, on behalf of the noteholders and the other issuer's creditors). However, this security is not commonly granted any more given the new segregation protection implemented in 2014 in the case of bankruptcy of the account bank, paying agent or servicer.
The following internal credit enhancement techniques are commonly used by SPVs:
Credit tranching (senior and junior classes).
Spread accounts or reserve accounts.
Definition of pay-out events.
Pledge over government bonds.
The following external credit enhancement techniques are commonly used by SPVs:
Related party guarantee (rarely used because of possible conflicts of interest).
Letters of credit (require the originator to pay attention to the intermediary rating).
The above lists are not exhaustive.
Risk management and liquidity support
Liquidity support is generally granted through subordinated credit lines and cash reserves. However, the lack of liquidity in the market, the reduction in some financial institutions' ratings and the introduction of tighter capital rules under Regulation 575/2013/CE (CRR) in relation to the provision of liquidity facilities, have rendered third parties liquidity facilities not so common in the Italian securitisation market.
Cash flow in the structure
Distribution of funds
Usually a priority of payments (which will be set out in the relevant securitisation transaction documentation) governs the cash flow and payment mechanics.
The cash flow index accompanying Diagram 9 of the Guide sets out a template priority of payments. The priority of payments depends on the relevant transaction and the order of payment being influenced by various factors, such as:
Rating agency indications.
The negotiation strength of the relevant parties involved.
The existence of a cash reserve.
Generic variations can include:
Separate payment priorities governing interest and principal proceeds, as well as for payments before and following enforcement.
Payment items in the payment priorities may depend on the occurrence (or non-occurrence) of trigger events.
There is no case law dealing with "flip clauses" in Italy that are generally contemplated in the priority of payments. However, the use of such clauses could be debatable where a swap counterparty involved may be opposed to the bankruptcy receiver of the swap counterparty.
Profit extraction is mainly achieved through:
Deferred purchase being paid to the originator or seller.
Subscription of junior classes of notes (sometimes with variable return).
Fees being paid to the originator performing specific roles in the securitisation transaction (as servicer or swap counterparty).
The role of the rating agencies
Current Italian Standard & Poor's, Moody's and Fitch ratings are, respectively:
Long-term debt: BBB-; BAA2; BBB-.
Short-term debt: A-3; NA; F2.
Sovereign rating has been affected by the increasing public debt and the decrease of industrial production and the need for structural reforms. It cannot be excluded that the sovereign rating may have an impact on the rating of the notes, which might require additional credit enhancement to obtain the desired rating.
What transfer taxes may apply to the transfer of the receivables? Please give the applicable tax rates and explain how transfer taxes are usually dealt with.
Is withholding tax payable in certain circumstances? Please give the applicable tax rates and explain how withholding taxes are usually dealt with.
Are there any other tax issues that apply to securitisations in your jurisdiction?
Does your jurisdiction's government have an inter-governmental agreement in place with the US in relation to Foreign Account Tax Compliance Act (FATCA) compliance, and will this benefit locally-domiciled SPVs?
A transfer qualified as a supply of services for VAT purposes, to the extent that it has a financial purpose and it is carried out for a consideration, would be subject to VAT at the 0% (VAT-exempt transaction). The financial nature of the transaction has been underlined by scholars with reference to transfers of receivables assigned to an SPV in the context of a securitisation transaction when the latter are executed for consideration (at a discount). In case the transfer would not fall within the application of VAT (based on a different interpretation of the transaction), it would be conversely subject to a 0.5% registration tax (the latter tax application generally would be prevented if the transfer agreement is signed outside the territory of Italy or by way of an exchange of correspondence).
Notes issued by an SPV incorporated and operating under the Italian Securitisation Law are subject to the same tax regime as provided for bonds and similar securities issued by Italian resident companies whose shares are listed on an EU or EEA stock exchange. The applicability of the ordinary 26% withholding tax (imposta sostitutiva) would depend on the category of noteholder. A specific exemption from such withholding tax is provided for interest (and other proceeds) received out of the notes by:
Italian tax resident joint-stock companies (or permanent establishments of a non-resident company to which the notes are effectively connected), Italian investment funds, Italian pension funds and Italian real estate funds.
Non-resident noteholders (without a permanent establishment in Italy to which the notes are effectively connected) if they:
are resident, for tax purposes, in a country that allows for a satisfactory exchange of information with Italy (White List States);
are the beneficial owners of the payment of interests; and
will deposit the notes with a resident bank or financial intermediary, filing also a statement declaring the eligibility for such regime.
The revenues of a securitisation transaction are solely dedicated to the benefits of noteholders (and other creditors of the transaction). Therefore, there will be no income taxed as far as the SPV is concerned, unless a residual revenue (if any) remains at the end of the securitisation after discharging all the obligation vis-à-vis the said noteholders (and other creditors).
On 10 January 2014, the Italian Minister of Economy and Finance and the Ambassador of the US in Italy signed an intergovernmental agreement (IGA) for the implementation of the FATCA. However, since the transposition of the IGA in the national law is still to be perfected, its provisions are not yet operative.
Recent developments affecting securitisations
See Question 2.
Other securitisation structures
The Securitisation Law has been recently modified introducing the possibility for SPVs to grant financing subject to the fulfilment of the following conditions:
Borrowers must be entities other than natural persons or micro-enterprises.
Borrowers must be identified by a bank or a financial intermediary.
The bank or the financial intermediary must have an economic interest in the transaction.
The securities issued by the SPV under a securitisation transaction carried out through financing can be subscribed by qualified investors only.
However, as the above reform is subject to implementing rules to be issued by the Bank of Italy, it can be assumed that the relevant implementing regulations will be issued in the second half of 2015 or first half of 2016.
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Comparative table: securitisation markets worldwide
Is securitisation well-developed in your jurisdiction? Is there a specific securitisation legislative regime for securitisation?
Securitisation transactions have been in the Italian market since 1999, when the Italian securitisation law was introduced. The Italian securitisation market experienced rapid growth until the financial crisis of 2008 and has been covering various types of assets, including credit facilities, mortgage loans and consumer credits.
Recently, the Italian securitisation market has seen many transactions regarding distressed assets (in particular non-performing consumer and commercial loans) and the Italian legislator has implemented some changes to the securitisation law aimed mainly at improving flexibility and efficiency of securitisation transactions, mitigating systemic risk and protecting investors.
Andrea De Tomas, Partner
Professional qualifications. Italy, 1997, Avvocato
Areas of practice. Banking and finance; insolvency and restructuring; mergers and acquisitions
Matteo Gallanti, Partner
Professional qualifications. Italy, 1999, Avvocato
Areas of practice. Banking and finance; capital markets